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tv   Market Makers  Bloomberg  December 9, 2013 10:00am-12:01pm EST

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>> live from bloomberg headquarters in new york, this is "market makers," with erik schatzker and stephanie ruhle. done deal. willcan and u.s. airways form the largest airline today. will customers end up paying more for fewer choices? we will speak to the ceo of the merged company. and the year ahead. the largest asset manager will make some big bets on 2014. we will hear exclusively from the president of blackrock. striking back. herbalife opens a new front in the war with the lachman.
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they are telling us that the hedge fund investors should pull their money out. itcome to "market makers." is december 9. it may appear that i am all alone, but i want to talk about elf on the shelf placement. erik schatzker is joining me. he is at blackrock headquarters. good morning. >> i am just a few blocks away at blackrock world headquarters. this is the world largest asset manager. they have $4.1 trillion. it pays to listen. i am here with the investment outlook. i'm going to be sitting down with the president. he is one of the cofounders of the firm. also, three of their other big stars -- we will talk about this outlook.
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let me remind you that you will not the larry fink. he is traveling in the middle east. he will spend some time with the clients. i did sit down with him on friday. we talked about his outlook and many of the things that you've heard him say before. you need to invest in stocks. there is no return to be found. inevitably, we got to talking about regulations. tomorrow, we will see the final version of the volcker rule. they have him very concerned. >> there's a possibility that we have gone to far next year. i am going to watch and see. i am not being a pessimist, but i am being pragmatic. about thosere markets than most. i am alarmed right now. it may be too far. it may have unintended issues
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that could be impactful. as you well know, he is a man who chooses his words carefully. i was paying close attention to that word alarmed. you do not hear him say that very much. that has me very interested in what the final version will look like tomorrow. everybody here -- that is for sure. >> as you know, i have all of the time in the world. everyone in the world will to. i need to take our viewers to the top story of the day. there is a new giant in the skies. and us airwayses have officially become one today. the new company starts trading on the nasdaq with the ticker aal. adam johnson is here. what is the strategy? >> there are three things he needs to do. >> he is the ceo. >> he started american airlines
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and when to us airways. now he will run the whole thing. here's what doug parker needs to do. he needs to fully integrate the two airlines. they are very different. he says he can generate $1 billion in savings and revenue growth. he says he will lower airfares. is he going to do that? as we talk through these issues, integrating is so difficult. on the one hand, there were only 12 overlapping routes between the two. that also says that you have airlines with different maps. they cover different parts of the country. us airways tends to be more of a short-haul airwave. american is more long-haul. how do you generate on sales gains when you need to better compete with delta and lower airfares? he has his work cut out for him. he started american airlines, went to us airways, now he is
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running the whole thing. if anyone knows how to do it, it would be doug parker. exciting to have him on the show and find out. >> why don't we bring him in? he was the ceo of both us airways and now he is the ceo of the american. he is perfect to run this. he is joining us from forward, texas. you have a big day ahead of you. talk to us about this integration and how it will be different from the rest of the industry. when i look at ual, it is still a mess. >> we understand fully that we have some work ahead of us. we are ready to get to work. we have done this before. we have the best team in the industry to put in place. the reality is that it is a lot of work. that is ok. there is a lot of value to be created. it is value for our customers. more people can fly to more places.
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we are not intimidated. >> what do you think the timing will be to roll your sleeves up? i remember the businessweek article talking about how it took 14 members over one year to work out what kind of coffee to use. when you think about merging these two businesses, what kind of timing before people say this is a success? >> our customers will see gradual improvement very quickly. we will do this in a way that is measured, but gets benefits as quickly as we can. you will not see many changes today. as we go through the holidays, we will keep the airline separate. as we start the year, very quickly our customers will have the ability to fly on both airlines with the same reservations. there will be a codesharing relationship. you will be able to use frequent flyer miles on either airline.
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this look again at the start of the year. putting together two airlines is a lot of work. some of this will be one year and a half from now. most of this is behind the scenes. customers will not see it. we have a very detailed line of work. >> congratulations on the deal. it took a little longer than you expected. when we sat down, you are very clear about the $1.5 billion in revenue. coupled with $400 million and higher labor costs. about $1ains of billion. how will you get to that number? >> thank you. it did take us longer than we thought. we are happy to have it done. the $1 billion as the $1 billion is a number that we feel comfortable about. we need to do our work to produce it.
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it is the result of putting two networks together. we are able to sell tickets but neither of us consult today. we provide utility that does not exist today. when we put two networks together, it allows us to take more places -- more people to more places. that will happen if we do our jobs well and put the two airlines together. we will also use a good piece of revenue to increase the compensation for our employees. that was about $1 billion in synergy and we feel very good about our ability. >> how do you think you'll have the ability to reduce fares? there are only three legacy airlines out there. should the consumer now feel like less is going to be more for them? >> fares will do what fares do. this is related to all sorts of things. demand in fuel prices, etc..
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the merger does not affect that at all. we're keeping all of the employees and airplanes. that is the way this works. we need all of that. the two networks are highly complementary. we put the two networks together and have everything we need. supply will be unchanged. if demand remains constant, there should not be any change in prices. price in our business has moved a lot based on factors. the merger will not be one of those. >> there are nine hubs now. chicago, charlotte, philly, phoenix, miami, new york, los angeles -- you have been at -- at a meant that you would not drop any hubs. are there any changes internally? will the nine hubs operate together? >> the networks fit together
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extremely well. those hubs you all work together in concert with each other. many of them are international gateways. we put them together and they fit together very well. with the employers will see -- this is a great day for our employees. they know how much value this creates. more importantly, this creates a stronger airline. it allows them to know that if they want to be in their careers, they can end their careers here. that is not something they have been comfortable up for a long time. it is nice to have that sense of security. analysts wonder what the future will look like. do you need it now that you are a going for the more profitable long-haul routes? >> with this new network, we will need more feed for the hubs.
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american needle will provide an enormous amount of feed to the existing american operation. it will continue to do just that. in the past, there have been suggestions that they might spin out. we will not do anything like that. it is not on the play right now. our job is to get these two airlines integrated and do that for our customers. we are providing the trolls that are needed to get the job done. >> on the employee front, you said this is a positive for your work worse. there has to be some level of streamlining. should we expect some kind of layoffs and the next 16 months? >> no. this is a transaction where we need all of the airplanes and all of the hubs and all the employees. we have agreed to know furlough detection. -- protection. we fully expect that we will need more, not less.
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there will be some reductions in management headcount. that happens in mergers. we're working through that process, and we do so with employees who are used to that. we do that in a way that treats them fairly. there will be some reduction, but for our main employees, we need all of them. >> you have a lot of work to do. thank you so much and congratulations. >> thank you. when we come back, blackrock outlook for 2014. where are the largest asset managers tell you to put your money? we will speak with their president. has a new strategy. i am not talking about selling vitamins. they're going after bill ackman. they're taking his tactic and using them against him. you are watching bloomberg tv. we are streaming live on your
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phone, tablet, and ♪
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>> you are watching "market makers." we're here in midtown manhattan at the headquarters of lack rock. we have an exclusive look at the year ahead for the world's largest asset manager. with me now is the cofounder of the firm and the president of the global operating committee. he is or spots will for day-to- day oversight of this cloth us in money management -- colossus in money management. great to be able to talk about this. you put your in-house think tank on the case and came up with a nice, colorful document that takes a look at investment in 2014. you identified three scenarios. one is low for longer, the other is growth breakout and if
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balance is tipped over -- what are we talking about their? >> first of all, welcome. at this particular point in time, people are very concerned about their future in investing. they have seen the stock market do pretty well. they are concerned about where bonds are. everyone is looking to squeeze more return out of their risk assets. how much more can they squeeze and should they have a finger on the button? we have an institute they came up with these scenarios. we debated them in an exhaustive way. over half of our senior portfolio managers think that lower growth for longer is where we are going to be. let me describe a little bit about what that means. it means that people think that their diversified on their risk. because bonds and stocks have become correlated here --
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>> they go up and down at the same time. >> they may not be as diversified as they think. what we're looking for is to get them to think about the gdp growth. it is fairly slow. stocks actually are being priced more about the price of momentum versus the earnings. revenues are not coming and where everyone thought they would be. top-are getting a pretty heavy as far as valuations go. they should look to go into other assets like infrastructure or real estate or other hard assets in emerging markets. they may be alternatives. we're starting to develop a basket of diversification for them in case this environment does arise. as i said, over half of our managers think low for longer. next year may be a boring year as far as where weights are and
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where the stock market goes. most importantly, people have to get invested. you cannot sit on the sidelines. while there is all this uncertainty, there are $10 trillion sitting in bank accounts earning nothing. you can invest in the future. we want to get people into the market and a much more diversified basket than just stocks and bonds. for longer,say low is that a call for the economy or on the market or will they both move in lockstep? >> it is both. growth is going too slow for a longer. of time. we think that the fed will keep monetary policy easy. short-term rates will remain where they are. long-term rates will budge up a bit. the stock market -- the peas are pretty high. we can squeeze a lot of juice
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out of that. we want to be a bit cautious for the longer-term right now. we want to make sure the people are using this diversification and understand the correlation may work against them up the market does react in a way that we are thinking. >> how is blackrock positioning itself to benefit from this environment? you have to look at the market and say, what do i do so that people invest with us? >> you will hear a lot today. you are in the right place. we will have our chief strategist talk to you today. they will give you an idea of where to be to protect yourself. one of those areas is diversification. not just in treasury, but more in credit. you are earning a coupon in the environment to offset potential rises in interest rates. there are alternative strategies that are moving outside and taking more risk.
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hopefully you will be paid for it. the other is in hard assets. a lot of people are underinvested at this point. there are changes in the market value, especially at home. they have overlooked real estate a bit. the other is infrastructure. we think that is so important, because it brings in long term cash flows. it also employs a lot of people. we expect opportunities in infrastructure to be front and -- on the front line for 2014. >> that is on the ideas front. how about the operations front? blackrock has more than 11,000 people already. is that enough to manage $4 trillion or even more next year? >> our business is all about providing solutions to our clients. managing money is a bit different today. our clients are coming and then they are giving us what they're
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liability is and what their problem is and what they're trying to solve. we sit down as a team and we come up with different areas of the firm -- different products that we have and services and we try to bring them the total solution. delivery mechanism to monitor risk properly. rather than style investing, people have moved to solutions oriented environments. that is were we built the firm. over one third of our people are in the solutions business. that combines all of the things that we do and provides a great client experience. >> that was a great answer. all i wanted to know is if you're going to hire anybody. >> we're holding the reins tight. it is interesting you say that because a lot of firms are not reinvesting. they are buying back their stock and raising dividends. there is not enough ipos that
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are coming back into the marketplace to replace that stock. that is actually driving the stock market higher, rather than revenue striping a higher. hiring is a really important aim. just like other firms, because we really do not see the light at the end of the tunnel, at this moment we are holding the reins tighter like every other firm. we are hiring, but we're hiring around the edges and being very cautious. other firms are doing this as well. >> great to see you here. that is rob capito, president of blackrock. much more coming up from world headquarters. moreve the reaction and after the break. ♪
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>> the janet yellen said -- what will it mean for investors? we will go to blackrock. ♪
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>> you are watching "market makers." we are here at blackrock world headquarters. we have an exclusive look at the world's largest asset manager. i am speaking with one of the world's foremost policy wonks. peter fisher is a senior fellow at the dartmouth school of this --s, senior head of undersecretary of the treasury, you have many credentials. >> you make me feel old. >> i want to ask you about something larry fink told me when we sat together on friday.
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in 2014, we are going to live in a world where central bankers are less important, even if they are not less powerful. what does he mean by that? >> we see countries all over the world trying to make a path from monetary policy to fiscal policy. >> they would love to be able to do that. it is a struggle though. >> they are trying to let go of the reigns of being the only game in town. that may be optimistic. i think that we would like to see fiscal policy play a bigger role. they are trying to get a hand off to consumption. they are trying to see a fiscal policy could be more loose. central bankers will be important, but they certainly would love to be less important. >> they would love to be, but markets are not letting them. think about the obsession with tapering.
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increasinglyooking like we might see the tapered this month. unhealthy?ession >> i think it is probably misguided. taper will take place in a context pattern. will they offset the tightening of monetary conditions? if you are a global investor, you want to think about that kind of offset. they will try to offset the taper themselves. it may introduce something else and extent of the forward guidance. they are finding some way to not just have everyone obsessed. i think it will be important, but it will not be the only game in town. >> can the fed offset the taper on its own? and do you expect the fact that they try to offset it themselves? >> i think they're focused on in
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japan and europe. whether they can, that remains to be seen. i think the fed will try to offset it. it is a powerful tool, but when you do not have qe, forward guidance is not quite as powerful as you would like. the bank of england has seen the market protest a little bit. growth is picking up and they have had a harder time on long- term rates. the fed will find some of that. that is one of the things they may consider, extending out the guidance another year. that is the way to find an offset. >> in the world that you described, central bankers are making it up as they go along. this is uncharted territory. how treacherous will markets be? fed think we have seen the through large asset purchases.
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that is a free option. a $5 billionbuy worth of stuff. that is the definition of a free option. notice the volatility. we will see a bigger change in volatility than the level of rakes. a number of us think that the forward rates are not that far off of where you might think equilibrium would be. those are going up a little bit. it is really the change in volatility that will have a bigger impact. more uncertainty, as we say. that will be an area for investors to think about. >> so i think i heard you say that we may not see the long end of the curve move:. a whole lot. have things bled out? >> i think it will back up a
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little bit. the rates are a little higher. it will not for all out of bed. unless something else changes. >> you are now the investment institute. i want to ask you about this outlook. the end of the year, for some people is nothing more than a calendar event. why is it important to actually put together an investment outlook and make decisions about what you believe will happen? institute is ak look inside our portfolio managers. we do not dictate how they run their portfolios. we have risk analytics. we try to get together three times each year. we get 60, 70 investors together. they share ideas and help each other get smarter. we all learn what we're thinking about and from that the outlook
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is coming out. it is more bottoms up. it is not top-down. we do not dictate, we listen to them. they listen to each other and we see what we can learn. >> you lived through your share of crises and market ups and market downs. as you look into 2014, how difficult is it going to be to invest successfully? >> i think a big challenge we will face is diversification. we have lived in a world for the last decade where stocks and bonds were not correlated. he went in different directions. the bonds were rallying. we may be coming back. we're looking forward to a world where that diversification is not there. ande get a big rate shock the volatility shot, the risk is that equities and bonds will correlate more. at least for a while.
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then you will want to be diversified. that is one challenge that we see ahead. >> if you are long and they both go up -- >> a wise investor will try to have some diversification. we certainly try to build our portfolios that way. >> thank you very much. that is peter fisher, senior investor at blackrock. as you know, his resume speaks for itself. a great view on the markets and policy. back to you. >> the exact kind of voice that we want to hear. when we come back, we are talking about herbalife and the fact that they are striking back. not enough public way. they are heading bill lachman right where it hurts. they are starting private meetings with his investors. that is coming up. ♪
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>> live from bloomberg headquarters in new york, this is "market makers," with erik schatzker and stephanie ruhle. bill lachman has spent the last year telling investors why they should know their herbalife stock. herbalife is telling his investors to dump him. there shares have doubled since he announced his bet against the company. this is a very unusual move for the target of an activist investor. he is a former bloomberg contributor -- we need to give credit to cap the burden. this is an extraordinary story. it does not sit well with me. this is a company that is under attack for waiting for audited financials. there is an insider trading issue. you have no time to respond to reporters. you of no time to respond to bill lachman. you have time to fly to new jersey and have a closed-door
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meeting to talk about his lack of ethics and the fact that he is out of control? this does not sit well with me. in general, this is a publicly traded company. their earnings have slid down to single digits. they should have better things to do than harass -- at the end of the day, it is one investor. it does not make a lot of sense for them as a company. they have a real credibility issue that they are not addressing. publicly or privately. as a defense, usually the defense is twofold. one is structural. you raised her notices and tighten up or. one is to go after the guy who is attacking you. usually, he is incompetent. you do not vote display. there is no slate tebow. you're not allowing that to proceed. going out and bad mouthing him -- he compounded and it will be a long conversation. isn't it fair to say, good or
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bad, there is no one like bill lachman? his investors know his style. he is met with skepticism at the onset. look at what he did. do you think it is a huge shock to his investors? i would be the first to say, is this a trade or a crusade? it seems like a crusade, and that is risky. >> the investors know what they're getting into. einhorn --s, david they are up 20%. ackman will come in in low double digits. i do not know his december results. that is an underperformance. yes, he will expect to get some pressure. anthinks outside the box in area where everyone is in.
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>> what does that make you think, though? he is putting a massive investment in one place. there is risk associated with that. when you look at what herbalife should be up to, should they be talking to bills investors or answering to their own? >> they should be answering to their own. bill, in october, did a smart move. he took a large percentage of the stock and put it into a long-term put option. therecent short squeeze -- expected short squeeze did not do him any harm at all. it does not really matter. it is a lower valuation difference. he has changed his structure and importantly, i think the fundamental question is is this a pyramid scheme? that is the question that he is a asking of that company. he sent a 52 page letter saying
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that you should think about giving this a clean opinion. he says he will sue you. >> this is not a hedge fund war. he says he is not war with anybody. a move like this on herbalife part, this feels like a war. i heard that he said if you stop, we will stop. it does not feel like an investment. not like the company that is doing the best that they can. it feels like they are at war. >> usually you will get one hedge funds trying to out jump another hedge fund. to get a company involved in this way, in a closed-door meeting, that is the whole . line. think you doke you not want to be involved with herbalife at all?
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there are more factors involved with how the stock is trading. couldn't one make the argument that you should get out of this thing? >> it makes it much more volatile. there are challenges in any activist investor situation. -- he would love to sell that to ackman. that will not happen. he has to figure out how to get out of this position with the profits bahia scott. it has become a very personal information -- situation. for ackman, to be honest, when you see what he says about immigrant laborers and taking advantage of people who do not know enough, he feels the government role is to step in and stop what he sees as an abuse. >> a regulatory short is a dicey way to run your business. you could be waiting forever. you cannot wait on the
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government. you could get carried out by your investors. even if he is fundamentally right, if you have carl icahn, you might want to get out. >> that is right. it is a binary result. all of this arguing about investors staying -- they are missing the point. it is a binary result. they're going to shut the thing down and say it is a pyramid scheme. or that it is a lucrative activity. >> it is high drama. the soap opera continues. i was great to get your expertise. congratulations. great scoop on herbalife. when we come back, it is a sticky business. trying to sell treats like cinnabon overseas. ♪
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>> brands like cinnabon and anti-and are stable in u.s. malls. how difficult is it for them to stand internationally? to sell in countries like libya and russia. joining us with insight and sent -- selling american treats a -- he is with us
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on the phone from atlanta. -- it is an international hit. why has it not translated internationally? especially in countries like russia and china where they love american culture? >> one of the things is that we have not printed them as extensively as some of our other brands. we will do that. one of the things you do is get that supply chain in place. carvell is more complicated. we have to work with dairies. we are getting a lot more and we will launch carvel in russia next year. we currently have development in the mideast that is starting to get some traction. i think that with that
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particular brand, the biggest challenge was the supply chain. >> what brand of yours is the most marketable overseas? >> clearly, it is cinnabon. >> why? ,> cinnabon is a brand that because of the venues that it operates in, lay is much larger than it actually is. if you look at the brand recognition on a global basis, it is not at the level of nike. it punches well beyond its weight. >> i have an emotional connection and it is usually after the delicious experience. and totally depressed of the calories that i took down. what is the emotional connection? >> it is an incredibly wow product. there is also a cliché. it is a comfort food. it is something that people connect to on a personal level.
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i am willing to advocate for it. >> what are the biggest challenges that you face? how do you do international franchise? >> we use to model train on. we use an exclusive developabl -- development model. ,n some of the larger markets togrant a master franchise an experienced operator. they qualify to sell the franchise in that market. so, those are the two models. gettingiculties are back to the supply-chain side. weis there a country that should think about as far as what matters most to you outside of the u.s.? >> i think that there are a couple of gold mines. it depends on where you want to hunt for that goal. oncurrently are focusing
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other companies -- it fits well with our strategy going into international. that is emerging markets. as bricks came to the forefront, we were not in a position to move quickly on those. if you look at a franchise growth, it will continue to be russia. followed by india. that will be a slower development as the market matures. overocus in terms of sales the next 12 months will be brazil. >> how about an ipo in 2014? >> that would be very speculative on my part. people are starting to have a lot of rumor about focus brands. we have enjoyed a great 12 year run. private equity holdings for that long -- people will speculate about it. nothing certain that this point in time. >> if that changes, let me know.
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i want to go down to the exchange for a celebration. thank you for joining me. it is approaching 56 past the hour, that means we are going on the markets. eric is not here, but i need to talk about abercrombie. they are falling. they wrote a letter to abercrombie and urged them to replace michael jeffries as their ceo. they are probably disappointed today, because they ignored the advice. the stock is feeling it. they are down across the board. they renewed his employment contract. it does not look so good if you are a shareholder today. when we come back, i have a lot more. it is blackrock day. the world's biggest asset manager is giving us their 2014 outlook. how to play europe, japan, and china. that is after the break. ♪
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>> live from bloomberg headquarters in new york, this is market makers with erik schatzker and stephanie ruhle. >> get ready for 2014. with blackrock top portfolio managers about where he is putting his money. on capitol hill may be getting close to a nickname it on budget but do not expect a grand bargain. and buying bitcoin. he for you spend the virtual currency you have to get it. matt miller found it is not that easy. welcome back to "market makers."
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>> and i am erik schatzker at black world headquarters. stephanie, coming up this hour we are going to continue our look at the year ahead of with the world's largest -- more than $4 trillion with blackrock overseas. is called a master tactician. it is easy to talk about what to invest in. ofbetter person i can think to discuss that then dennis. it is going to be a difficult year. i would recommend everybody listen in and get a much better idea of what to do with your money. it is easy tonk say master tactician let alone be one. the top news stories from around the world, new american airlines have officially taken off.
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between american and us airways officially closed today, creating the world's largest air carrier. the new ceo is doug parker. current the airways in a merger with american west eight years ago. hedge fund billionaire john paulson is making a comeback after getting powdered -- getting battered by couple of years of wrong bets. the recovery fund is up 55%. that is according to people briefed on his return. he is known for making $15 billion by betting against the subprime mortgage market. and there is a new box office champion. the animateden, film took in $33 million over the weekend, knocking the hunger games sequel off of the top spot after just two weeks. on an is loosely based fairytale.
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question --ing the my next guest think so. cheap economist at goldman sachs. he is one of the most respected economists on wall street. he estimates growth will accelerate to 2.9% next year. welcome. about fedtalk guidance and how much weight you put into it. oncemay ben bernanke said we get to seven percent unemployment we should be done with the taper., at seven on getting out of the fed? do you do anything at this point? >> what they say matters near term. over the next couple of meetings you will want to put some weight on it. looking further out, we try to andur own analysis
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ultimately our own analysis of how the reaction functions are going to evolve. when he had these kinds of signals that turn out to be pretty bad guide to the near- some then it does create confusion. theink the seven percent at end of the june preference -- at the end of the june press conference was unfortunate. >> the last five years have been a modest recovery at best. what is the catalyst that will drive things forward now? kulaks the private sector has improved quite a bit. you exclude the fiscal drag of one and a half percentage points in 2013, then the economy has already been growing at a three percent pace. that is a big assumption.
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i don't think it is unreasonable. going to 2014, it won't be zero but it will set some by a percentage point. i think that is going to get to you from the quarter growth environment. >> what is last friday's jobs number mean to you? kulaks it was a little stronger than expected. the diffusion index. household survey was a bit more mixed. the unemployment rate came down by more. all and all it is a good, not great report. as we look at the other
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indicators, overall it is more light and shadow. are trying toople get their head around this area would signal shall we look to to get an understanding? our forecast is march. i would not rule out december. january is certainly possible. march is our highest probability. there is also a probability that it will take longer than that. the labor market and economic data activity matters. the number we got on friday -- it is a new low for the year. that is an argument against tapering.
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and how that evolves is going to -- mportant >> what type of market reaction do expect out of the taper? one would say the market has done so well. them a lot of at the 10 -- itends -- >> a lot of depends on what you get over the summer, mainly when the markets called into question the longer path for the funds rate. if that is one of the key things we are thinking about, how to engineer a strengthening of the forward guidance that prevents .hat from happening there are a couple of options on the table. mostwe think will be the effective one will be a reduction in the six and a half unemployment. also thinking about more qualitative changes, a
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lower bound on the inflation rate. that hasn't been completely hammered out yet. become if they have not decided yet, it will be reasonable to go a little later on that earlier. >> you think it makes that much of a difference at this point? you think it affects america or does it affect wall street? >> i think it affects wall street and america. transmit toicies don'tal economy and i think you can completely separate that. do i think the effect on america huge from ao be tapering announcement? no, i don't think so.
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i don't think it has to be such a big deal. that is why they want to be pretty careful about how they roll this out. believe qe is still a positive for the american people. even those who are bare say they will be along the market. well thelook at how s&p has done this year, it does leave people with a bad taste in their mouth. >> i think an increase in stock does have some effects on real economic activity. i also think the increase in that we prices this year -- it is not always affect monetary policy. despite the step up in the fiscal drag at the start of the year, the economy seems to have dealt with that reasonably well. very stronghave roles but at two percent roles
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in an environment which you have seen a percentage point of fiscal drag is not that bad. year we areto next going to see a stronger growth path. i don't think you can entirely financial market affect and what the real economy does. it is really financial conditions that matter. >> thank you so much for joining me this morning. economist atef goldman sachs, a man who knows a few things about the economy. in a moment we are going to have more from blackrock. we will get the global view from investing in one of the biggest asset managers. negotiations are playing small ball. there may be a deal but it will not be a big one. we will have that's next on "market makers."
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them a welcome back, i am erik schatzker here at blackrock world headquarters with an exclusive look at the year ahead from the world's largest asset manager. it is time to talk about tactics with the man i like to call the master tactician. he is head of the global allocation team here at blackrock and runs the local allocation fund, overseeing $96 billion. you can invest in pretty much anything anywhere around the world. lot of choices. right now, what looks best to you? >> the best trade-off is clearly japanese equity. the japanese market was very very good to investors in this year. we have been positive over a year.
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the right time. >> we certainly did. it was a combination of factors that was irresistible. growth,n, earnings political change, a clear catalyst and a lot of pessimism, giving rise to rate -- giving rise to greater optimism. >> i want to bring up a chart that you provided us and helps to make this point. earnings growth helps to explain what is going on in japan. people think people are just piling into japanese equities because there is a lot of liquidity in the market. that does not explain everything. it explains part of the multiple expansion. -- andiple expansion 2013 multiple expansion has been less in japan than any of the other worlds market.
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multiple expansion explains much more in the u.s. and in europe than it does in japan. >> that is to say we could see a multiple expansion in japan, the likes of which we have seen here, that would give the market they're much more of a tailwind? demo we see lots of room for that. -- >> we see lots of rooms for that. our expectations for earnings and 2015 is 14 significantly higher in japan than in the u.s.. the japanese market sells under -- 2014 2014 in estimates. 2014 earnings could be up 20% and we think 2015 could be up double digits also appeared the u.s. market is also probably
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going to growth -- growth single digits. if you look price-to-book radios theise to book ratios, accounting in japan is significantly more conservative than in the u.s.. them a people -- >> people to say the same thing about japan as they do the american market, ultimately earnings are going to grow long-term and fulfill these kinds of expectations. needs to be real structural reform. >> the potential for real structural reform is the icing on the cake. but the cake is valuation plus earnings, plus under ownership of equities by japanese households. and then if you put on top of
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that the different behavior of u.s. corporate managements compared to japanese corporate there is a ton of room to increase leverage, to change the capital structure in isay that is not magic, it just about managing the balance sheet. >> even if they behave a little more like american ceos the changes could be dramatic. >> we like the equity markets much better than the bond markets. invest in the global allocation fund. there is an nowhere in the world we think offers great opportunity and bottoms. the coupons are just not high enough to help investors achieve
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their investment objectives. that means equities is the place to go shopping. while we think japan is the best we also think europe and elsewhere is attractive. europe is earlier in its cycle. m a look at the periphery, look at the banking system. >> it is not a perfect picture but it is an improving picture. it is not without risk. the decision to backstop the european banking system took the risk off of the table. there still needs to be more capital injected into european banks. this sense that the system was really teetering, i think it has past history. >> what about emerging markets? they have been a huge disappointment and 2013.
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what about 2014 and 2015? >> the economies in the stock market, the immediate term, and it seemsr-term -- nearly certain that over the long term emerging comedies -- emerging economies are going to have low growth. you just have to look at where the labor forces in the world are growing. is such a huge driver of economic growth over the long term. we think you can be confident growth is in the emerging market. stock markets are different. this is about profits, monetary rule of lawsthe about corporate governance and management, there are a whole lot of things.
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the commendation of valuation and what is going on in the monetary picture, there is less liquidity to help the emerging markets them was the case three or four years ago. >> thank you very much. i call him the master tactician. himself, i will be back in a few minutes with blackrock. back to you a few blocks away. >> in a moment, getting your hands on bitcoin. it is not like there is an atm for virtual currency. we'll have that coming up next on market makers.
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>> in venezuela, a victory in yesterday's local elections. show the majority of the united socialist party won at least 44% of votes in the mayoral elections. he may get more support after imposing price controls to fight inflation. there are victories in caracas and several other cities. he appeared on tv an average of 90 minutes a day. that is today's latin america report. may be he can fill in for me next time eric is out. we are 26 past the hour. bloomberg is taken you on the markets. let's head to ruby tuesday's. the company has hired goldman to
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explore a sale according to that wire. they are still down year to date but they are having a bit of positive momentum today. and cisco has agreed to by u.s. foods for 3.5 billion dollars in the largest food distribution deal in north america in over 80 years. -- in over eight years. and the stock is at the highest level since 2004. todayld's is falling after disappointing same-store sales. oneu.s. market makes up third of macdonald's revenues. they were using happy meal treats from frozen may be more people would be in there. when we come back, congress going small. negotiators are coming up with a cease-fire.
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we will have that story in a moment. knowverything you want to about bitcoin but were afraid to ask. matt miller is a knee-deep in virtual currency. this is market makers on bloomberg tv.
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>> this is market makers. i am live at black rock world headquarters with an exclusive look at the world's largest asset manager. is the chief investment strategist at black rock. your colleague just gave us a schooling on japan. i want a schooling on u.s. markets. what shall we expect next year? >> 2014 is going to be a another good year. people have more modest expectation based on what an extraordinary year it wasn't 2014. when the economy gets better there will be fewer headwinds.
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valuations are a lot richer than they were a year and a half ago. we have more of a challenging starting point than we did at the beginning of 2013. while stocks are reasonably valued, they're closer to more fully valued. >> give me a sense of what you think might happen. stocks are up 30%. >> what white we see? >> i think it is a much more modest year. gains but i 30% think the challenges matt is going to get you into dangerous territory. what is happening in 2013 is a lot of those games were predicated on multiple expansion. people were more willing to pay up for dollar earnings than they were a year or two ago. we think a good year and more modest gains.
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>> what ultimately best explains why people were prepared to pay up at 2013? in 2013 we have quantitative easing. returns are so skimpy. to explain why people won't pay up for stocks because you expect the fed to withdraw her liquidity? >> i don't think it is people won't pay up, what you need to do is see those games driven by earnings. this year was much more about quantitative easing. it was about easing monetary conditions. it is not going to be quite as accommodating as it was this year. the market is going to need to grow on earnings. that means we're going to need a stronger economy to grow the top line. >> where's that challenge going to come from? >> a couple of places.
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there will be fewer headwinds next year. and 2013e surprises was the economy was very resilient in the face of a massive amount of fiscal drag. won't have that repeated next year. another thing which will help, household balance sheets earn a better condition. people are feeling better about their balance sheet, about home , it can give you some momentum's from the economy. >> the data suggests the economy was more resilient than some people thought. --have not seen much growth even if it doesn't affect the tertiary number, that is the way
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they have been able to entice investors. >> we will have more of that and 2013 that in 2014. that in late 2014. it will be a tailwind. what you need is a faster growth. ae u.s. economy has done phenomenal job in a slow growth environment by keeping a tight rein on costs. labor costs have been growing very slowly. if you are going to see a more aggressive or better environment for earnings, it is going to need to come from faster topline growth. not only here but globally. >> you make the point about earnings growth. we have a chart that illustrates corporate process versus wages. the disparity is amazing. wages are declining. >> wages have been declining and this is very important.
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when you think about 2014, we are talking 2.3 -- two and three quarters? middle income households have been experiencing falling real wages. this has been going on for a long time. inflationincome on basis peaked in the late 90s. a fastergoing to see economy, that is going to have to be built on after wage growth. so far that is not happening. >> do think it will happen? >> i think we will see some improvement in 2013. that will help. many of these factors that have been suppressing wage growth -- think about technology and the global arbitrage. this is not a function of what happened in 2008.
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these factors have been influencing slow wage growth for a long time and will probably continue into 2014. what does modest mean when we talk about stock market in 2014? >> summer in the mid-to high single digits. he is a chief strategist here at black rock. it has been an amazing day. more importantly, how to invest in that kind of environment. anthat is an all-star to -- all-star lineup. we have more to talk about, not what is happening in new york but taking you down to the sea. enough to prevent another government shutdown? we will ask al hunt. that is coming up next on market makers.
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>> call it a not so grand bargain. negotiators on capitol hill are getting close to a deal on it a jet. it would reduce the automatic budget cuts called for by sequestration but it won't do anything about corporate tax breaks. i want to take us to washington and bring in al hunt. i guess i can't believe people
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are talking about the great he'll be negotiated. what is this deal? no entitlement reform, no tax hikes, that is no nothing. >> it is very close to that. deal that has politics written all over it, not much economics or fiscal sanity. i think they will come up with a deal. it is not certain they can get it through the house and senate. it does nothing for long-term entitlements, nothing for tax loopholes. it only partially replaces the sequester, which most people think is mindless. pure andent for it is simple. for the republicans, they avoid another government shutdown in mid-january. the last one was a disaster for them. ofocrats get to replace some those questioned cuts they find especially onerous. >> it was a disaster for
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republicans but it was a disaster for the reputation. what about the american people and for trillion dollars in debt? term thatface a short problem. ist they ought to do now figure out a way to address that long-term deficit because it is rather painless in the immediate future. politicians, the future there will be nothing of significance that comes out of this deal. >> let's say they get a deal but lawmakers still push back. what does that say about what is happening in the sea -- in d.c.? >> if i was a good speller i would say it is his function. i don't spell very well. now the democrats -- and
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they need democratic votes to get this through the house -- the democrats are complaining federal workers having to pay their pensions. workers, someal of the republicans don't like the idea of replacing the sequester. they don't even like some of the user fees that are going to be imposed on airline passengers and customs. even the small stuff in today's climate draws a flag. do we need a clinton or christie in the white house? >> i'm not even sure the big c would do it right now. the parties are so divided. that is such polarization those in the middle get hit from both sides. we probably need to go through a crisis or two or an election travel or two before we get anything big. >> even long-term, is there any
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chance of a grand bargain anytime in the future? >> not in this congress. -- conceivably the 2014 election could change that and baby the 2016 election. >> the house goes home on friday, then what happens? you will still invite me on the show so we can find something to talk about. there will be foreign issues, as always. once congress goes back there is issues thatlot of dominate washington for three weeks. >> thank you so much for joining me today. al hunt, our own bloomberg view columnist. when we come back, just in time for holiday shopping and we are going to show you how to buy
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bitcoin. all you need to know about the virtual currency from our own matt miller.
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>> all day tomorrow, we will be inside ups. it is the busiest time of year for the package delivery company. carol massar will be at the world court. the company has one that has a $1 billion hub in kentucky. only carol can look hot in a brown uniform. the amount of cap packages this -- carol will be on hand getting it done. she will be doing a live
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interview with scott davis plus the story of o ryan. that is the algorithm expecting to save ups aim -- save ups $50 million per year. turn ouring to attention to the virtual currency bitcoin. on friday it plunged more than 20%. we decided to celebrate the 12 days of bitcoin here at bloomberg. matt miller kicks off day one. we had a chance to talk earlier this morning. getting your hands on a bitcoin is like tracking down a weed aler. >> it is like buying weed. >> not that you would know firsthand. >> i haven't bought weed in months. it is a community of people more than an exchange.
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run -- you have to know the right people to ask advice from. you ask around and the group knows. >> you have to be inside a mafia of a guy who knows a guy? is an event that has kind of started at the social -- it is growing a movement. it is not obviously at the level of the dollar or the euro yet. a lot of people are using it. a reporter was using it to live on a week. a couple try to live on it for three months and made a documentary about it. a lot of people are using it and not thinking about it as an investment. >> you are talking about document makers and journalists -- how hard was it as an
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american -- >> it took me a while to figure it out. i was just googling it. redditgetting flamed on this morning. i managed to order a pizza. >> are you not familiar with the world wide web? >> i spent a lot of time outside. i used the web a lot but not for this stuff. for one thing i am supposed to show everyone this -- this is what my qr code is called. people have been sending me three dollars or four dollars and it is a gift community more than it is an exchange community. let me show you the exchanges i have made so far. tip,ne just sent me a
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$1.99. >> we have 20 seconds left. >> is bitcoin a buy or sell? >> i am into it. i am going to use it for the next 12 days. >> we will be back with more market makers.
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>> that is it for market makers. we have the president of one of the world's biggest advertising companies.
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ad agencies are facing a brain drain because of places like facebook and google. it is not just stephanie ruhle day, we are going to be talking about the impact of the vocal role is having on the entire financial industry. scarlet fu. >> it is time for today's options insight. the partners say it is no longer a buy right now. joining me with more on that call and his strategy for investing in this global industrial company is jim stricker. he is a derivative strategist at mk m partners. before we get to your specific strategy, tell me about downgrading to a neutral. -- heis a stock covered has been very bullish for the three years he has covered it with a buy rating. what has happened here is the
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company has almost executed to well. they spun off on their security business. they bought back a million shares from last year. the stock is up 100 some the percent in 2011. it has outpaced the s&p 500 by 90 percentage points. from a valuation perspective. it is not a negative call per industrialsout the in the coming months. >> a possible catalyst has been exhausted from the stock at this point. you still want to use the shares, you want to generate -- income out of stock >> that is exactly what we are looking at. looking out to march of 2013, $56, you can strike the call. bring in about 2.6%.
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the company pays a 1.5% didn't yelled -- 1.5% evident yield. -- dividend yield. >> if the company still has cash it could do a stock buyback and push the share price higher. >> that is really built into our work. the expectation that they continue to buy shares. in a best case scenario they buy back another billion dollars of shares this year. their most important market really takes off in 2014. if you put the current multiple getting justs about $60. best case scenario, we are talking about 20% upside. >> why do you want to have something that is realized in march? >> not a whole lot of premium to
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be taken out of that. i would say that timeframe really matches up well where we will get a good sense of how strong nondiscretionary investment is as far as commercial buildings and 2014 and gives us a nice opportunity to reassess at that time. >> it gives us a sense of where the investors feel the u.s. economy is heading in 2014. talk to me about what you think the view should be on industrials overall? how should they play that? >> that is a good point. we are more cautious on industrials overall. the two performing sector since march of 2009 both look pretty fully valued on a historical basis. trade we like is if people are realizing gains and individual stocks, a nice way to keep exposure is look at xl i
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buy some march calls. there was a 30 d. about 30% of the upside is in the stock at initiation. a nice way to keep long exposure on as you're trimming individual stock positions. >> to trades for everyone out there. thank you so much. we are on the markets once again in 30 minutes. "lunch money" with adam johnson is up next. ♪ . .
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>> welcome to "lunch money" where we tied together stories in business news. t minus four days until congress goes on vacation. still no deal. is this a series of interviews. today we're going to show how you buy fake toys. new bikes actually cost less than a vespa. how much would you pay for a pen? let's are all for politics. it was a cy,


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